Q. By what time must an unpaid present entitlement (UPE) be paid to a company from a trust distribution for the 2011/12 year to avoid the application of Division 7A in the absence of a complying loan agreement?
All legislative references are to the Income Tax Assessment Act 1936 (ITAA 1936) unless specified otherwise.
Assuming the UPE is not converted into an ordinary loan or considered to amount to the provision of financial accommodation or an in-substance loan prior to the relevant time, the UPE needs to be paid by the company’s lodgement day for the income year following the income year in which the distribution was made. In the circumstances, as the UPE was created in the 2011/12 income year, this would require the repayment to be made prior to the company’s lodgement day for the 2012/13 tax return.
Tax Office interpretation
The ATO introduced its interpretation of the provisions in Division 7A in Taxation Ruling
TR 2010/3 and Practice Statement Law Administration PSLA 2010/4 with respect to the treatment of a UPE arising on or after 16 December 2009. For the purposes of this question, we have assumed that the UPE will not constitute an actual loan or a Section Two loan in accordance with TR 2010/3 or PSLA 2010/4.
In accordance with the provisions, a UPE will be treated as a Section Three loan on the lodgement day for the trust for the income year in which the present entitlement arises. For example, where the trust’s 2011/12 income year is due on 15 May 2013, the Section Three loan is made on this day (PSLA 2010/4, para 97).
As the loan is taken to have been made during the 2012/13 income year, the trust has until the lodgement day of the company’s 2012/13 tax return to pay out the UPE or enter into a loan agreement (s 109N; PSLA 2010/4 para 98–99).
[04-07-2012]
Q. Person A is 64 years old and contributes $420,000 of their non-concessional superannuation contributions in 2010/11. Person A is 65 in 2011/12. Can they contribute the remaining $30,000 of their non-concessional superannuation contributions or do they have to wait until 2013/14 to make further non-concessional superannuation contributions?
All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) and the Superannuation Industry (Supervision) Regulations 1994 (SISR) unless specified otherwise.
As part of the bring forward arrangement for non-concessional contributions, a taxpayer who is under 65 years of age in an income year can bring forward the next two years’ cap entitlements as the taxpayer’s non-concessional contributions cap over the three-year period, as discussed below.
For example, if a taxpayer triggers the bring forward rule in 2010/11 and turns 65 in 2011/12 (as in this case), the taxpayer can contribute the remaining $30,000 of non-concessional superannuation contributions in the other two years covered by the rule – that is, 2011/12 and 2012/13.
Note also that, at the time of the later contribution after turning 65 (in 2011/12 in this case), the acceptance of contribution rules in reg 7.04 of the SISR must
also be met.
Operation of the bring forward contributions arrangement
Under the bring forward contributions arrangement, a taxpayer’s non-concessional cap in the first year is three times the annual cap amount, and this cap applies to all contributions made in the first year and the next two years. For example, this will enable a taxpayer in 2011/12 to make non-concessional contributions totalling $450,000 covering the 2011/12 year and the next two financial years (s 292-85(3), (4)).
The bring forward arrangement is triggered automatically if the taxpayer is under 65 at any time in the first year in which the arrangement applies and contributions in excess of the annual cap are made in that financial year. For example, if the arrangement applies in 2011/12 (Year 1), the brought forward cap for the second year is the unused cap amount (ie the cap of $450,000 under the bring forward rule less the contributions made in Year 1), and the brought forward cap for the third year is the unused cap amount (ie $450,000 less the contributions made in Years 1 and 2).
Acceptance of contribution rule
A taxpayer who uses the bring forward arrangement is required to meet the work test for the purposes of the acceptance of contribution rules in SISR reg 7.04 once the taxpayer turns 65 even if he/she is using up the remainder of a bring forward cap, as discussed above.
The ‘work test’ requires a person to be gainfully employed on a part-time basis during a financial year. The work test is met if the person was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that financial year (SISR reg 7.01(3)). For example, a person who works 40 hours in a fortnight can make superannuation contributions for the rest of the financial year.
‘Gainfully employed’ means being employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. Gain or reward is the receipt of remuneration, such as wages, business income, bonuses and commissions, in return for personal exertion in these activities. It does not include the passive receipt of income – for example, receipt of rent or dividends (SISR reg 1.03(1)).
[17-04-2012]
Disclaimer
The date given in square brackets after each answer is the date on which the answer was sent out. The information is based on CCH’s understanding of the law as at that date.
